Value Added: A Chat With Eric Hovde

Most Fridays I walk from my office over to the The Palm restaurant a few blocks away, where I reward myself with a nice lunch. It's something I started 10 years ago to help me get through the week. People usually oohh and aahh when I tell them I am a regular at The Palm, but I will share a little secret: you can lunch at the bar for less than $25, and hear a great joke from host Tommy Jacomo.

Anyway, I take the same route to The Palm each week, which takes me by the offices of Eric Hovde, who works across the street in a townhouse, where his various financial businesses are located. Eric heads up Hovde Capital, Hovde Financial and Hovde Acquisitions, and has offices across the country, including Palm Beach, Los Angeles and Dallas. There's a bunch of technical terms I could ascribe to what he does, but simply put, Eric runs a hedge fund that invests in bank stocks and financial services companies.

At 43, he also runs a foundation and started a home for street children in Mexico City. I called him last week to interview him about the recent travails in the financial services market. After we got talking, I asked him if he wouldn't mind if I asked him some questions for Value Added.

Eric Hovde

Q Have bank shares have bottomed out? Or will there be more write offs? Where are we in the cycle?

A. Unfortunately, it is my opinion that bank shares will continue to decline--and potentially meaningfully--over the next six to nine months. It typically takes 36 months before you reach the bottom of a credit cycle and, given that it started in the third quarter of 2006, I do not foresee credit trends flat lining until late 2009. There will be more write-offs tied to housing now that housing prices are collapsing and we are at the beginning of credit deterioration in many other areas such as consumer, corporate and commercial real estate loans.

How is Federal Reserve Chairman Ben Bernanke doing?

Fortunately, better than Greenspan who laid the groundwork for two enormous bubbles and did not exercise his regulatory oversight responsibilities. Bernanke has shown the ability to be creative by using other tools than just the fed funds rate. However, he needs to take a far more aggressive approach with Wall Street and the large investment banks in shoring up their balance sheets and reducing their risk to the economy.

How does this downturn compare to the banking-real estate downturn in the early 1990s?

Some striking similarities, yet some great differences. The similarities of both downturns are causing significant devastation to banks' balance sheets and their capital levels and will ultimately cost the taxpayers a lot of money. The differences are that, in the late 1980s/early 1990s, it was commercial real estate that collapsed, causing repercussions to housing and other industries. This time around, it is the residential market which is much more important and a bigger asset class than commercial real estate. Another difference is that the Fed is being much more aggressive early on in the process.

Was it right/fair for the Fed to bail out Bear Stearns?

I understand the Fed's concern in not allowing Bear Stearns to collapse. However, I have a fundamental problem with how they handled the bailout. To have allowed shareholders to have received any money when the taxpayers are going to absorb several billion dollars in losses and further to allow J.P. Morgan to renegotiate the price to $10 per share that, in turn, allowed Bear's Chairman, Jimmy Cayne, to sell $61 million in stock, was fundamentally wrong. When 1,300 banks and thrifts failed in the late 1980s/early 1990s, shareholders received nothing, and management teams were immediately terminated and in many cases prosecuted. They are allowing the wrong risk/reward parameters to continue on Wall Street.

Tell us some of your favorite investments. Where is Hovde hedge fund money invested these days?

We have been long gold because in the Fed's attempt to save the economy they are destroying the dollar. There are insurance companies and banks that are in certain product types and/or in geographic market areas which face substantially less risks. However, most of our returns have been generated by being short a variety of different financial stocks, particularly those that are substantially levered to housing.

Where was your last vacation? Last book read?

Last vacation: Half Moon Bay in Jamaica, my family's favorite resort in the Caribbean. Last book read: "Next," a Michael Crichton book about genetics.

What is your favorite Washington sports team? Do you have season tickets?

I was born in Wisconsin so I am a die-hard Green Bay fan. However, the Wizards are my favorite DC team.

What is your ringtone? Do you carry a Blackberry?

My ringtone is normal/the standard and, yes, I carry a "Crackberry"--it is a necessary evil.

What Washington area businesspeople do you admire?

Bill Marriott--he has built a very impressive company and yet has done it in a moral and ethical way.

What is your biggest indulgence?

Great adventure trips around the world. The first time I went to the Amazon, I went to Angel Falls in southeastern Venezuela, which is the highest waterfall in the world. It is in the jungle where we had to take a very small plane to a base camp and then take a small motorized canoe up river for a day to another base camp and then hike to the falls which were spectacular. I have not climbed Everest but have hiked in the Himalayas in Bhutan, the last kingdom in Asia. My favorite climb, though, was Kilimanjaro in Tanzania.

Comments

This is a great blog, especially the most recent piece on Eric Hovde. His surprisingly candid comments on Greenspan are a breath of fresh air -- too many people ignore the problems that guy caused while at the Fed. Problems that Bernanke is trying to clean up after.

Posted by: Walter JC Mitty | April 22, 2008 5:29 PM

Pithy comments from Eric Hovde - especially with regard to Alan Greenspan and on the Bear Stearns buyout. Fed must be careful how it 'midwifes these shotgun buyouts" (How's that for mixing up the metaphors?) - but Hovde ignores one HUGE difference - in the S&L crisis, stockholders got nothing because the firm's current worth went negative in all the cases I know about, while Bear Stearns stock never got even close to the $2.00 per share figure. Don't know if $10/share is fair, but Jamie Dimon evidently thought so, and he is the one accountable to JPM stockholders and their board.

The above in no way excuses Jimmy Cayne. Were I a Bear stockholder, I would be busy organizing a demand that Cayne be sued to recover damages for misleading employees, regulators, and the public with statements he knew - or should have known - were false. But, that is an issue separate from the question of whether stockholders of a troubled financial institution should lose their entire investment in a buyout - what they get should depend upon the residual value of the firm to the buyer.

Hovde is right about 36 months being the historic downslope, and may be right about 36 months this time. But don't bet on it. Took Japan a decade to dig out from under their real estate bubble debris. And, I suspect the only thing that will shorten the current downslope is the upslope of another bubble. So, what I am looking for is the NEXT bubble.

Posted by: Charles - Warrenville, IL | April 22, 2008 9:52 PM

Kudos to the Post for this new feature. The "company town" nature of Washington leads to an obsessive focus on politics.
This blog sheds light on the many other people working productively in the nation's capital who are not involved in politics.

It's refreshing to hear candid assessments about government decision making from someone who has neither an ax to grind nor a vested interest.